From “uncomfortable to scary”
Greetings from Hong Kong, where we’re girding for another week of typhoons and tear gas.
As a long-time resident of this city I’m accustomed to the former—but not yet the latter. I returned Thursday after nearly a month on the road to a Hong Kong that feels far more somber and subdued than the one I left. It’s not just the weather. There are fewer tourists. The luxury boutiques are empty. Even the stock market is in a funk.
And little wonder: demonstrations have become a part of daily life here lately. Today, two rallies rage even as I write: one on the Hong Kong island side of Victoria Harbor supporting police, the other in the Mong Kok shopping district on the opposite shore denouncing police brutality. Tomorrow, two marches are planned. On Monday, activists are calling for a multi-front “general strike.” Just getting around town has become an adventure.
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Unrest in Hong Kong is among the many topics leaders of China’s ruling Communist Party will debate as they gather this month for their annual summer retreat in the northern resort town of Beidaihe. Also on the agenda: China’s slumping economy, Beijing’s deteriorating relations with Taiwan, and a spreading epidemic of African swine flu that is driving pork prices to record highs.
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But the big issue looming over this year’s confab is the ongoing clash between the U.S. and China over trade and technology—a confrontation that shifted to a completely new risk level Thursday following Donald Trump’s surprise threat to slap 10% duties on $300 billion worth of Chinese imports beginning September 1.
The tariffs will heap new weight on China’s economy, already suffering from its slowest growth in 27 years. The Economist reports that the proportion of new college graduates in China who have found full-time jobs within six months of graduation has fallen from 78% in 2014 to 75% in 2018, while their average monthly salary has fallen from $690 in 2015 to $576 in 2017. China has vowed to retaliate tit-for-tat against Trump’s tariffs—although, as the Wall Street Journal notes, it has limited options for doing so without damaging its own economy.
In announcing his new tariffs on Chinese imports, Trump struck a bellicose tone, vowing to “tax the hell out of” China and declaring that, “if [China] doesn’t want to trade with us anymore, that would be fine with me.”
But the U.S. president should be careful what he wishes for. Economists argue, almost unanimously, that tariffs on China mainly tax U.S. importers, who do everything they can to pass that cost on to American consumers in the form of higher prices. According to an estimate by Oxford Economics, Trump’s tariffs on China will cost the average American household at least $700 a year.
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And as the Wall Street Journal points out, Trump’s tariffs result in an indirect tax on American exports. Data released Friday show that, in the first half of 2019, U.S. imports from China dropped by 12%, enough to oust China from its position as America’s leading source of imports. But U.S. exports to China fell 19%, as retaliatory tariffs and other barriers imposed by both nations took their toll. Because the U.S. economy remains relatively robust, total imports to the U.S. rose 1.5% in the first half from a year earlier, to $1.6 trillion. Meanwhile, America’s overall trade gap widened by 7.9% over the same period a year ago.
Trump’s threat to slap new tariffs on China sent a chill through U.S. stock markets, which fell Friday to their lowest levels in a month. The trade standoff also has cast a pall on cross-border investment between the two economies. The value of foreign direct investment and venture-capital deals between the U.S. and China sank to $13 billion during the first half of 2019, a decline of 18% compared with the previous six-month period, according to data released Thursday by the Rhodium Group.
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All of which led Bloomberg‘s Brendan Murray to conclude that this was the week that the U.S.-China trade war went from uncomfortable to scary. I couldn’t agree more.
Clay Chandler
– Clay.Chandler@fortune.com
– @ClayChandler